On 22 February, 2013, Guizhou Provincial Pricing Administration (“Guizhou Pricing Administration”) released the decision to impose a penalty of RMB 247 million (about USD 39.8 million) on Kweichow Moutai, the most famous Chinese state-owned producer of premium liquor, for administering resale price maintenance (“RPM”). On the same day, Sichuan Provincial Development and Reform Commission (“Sichuan PDRC”) released its decision to penalize Wuliangye, another state-owned premium liquor producer, in an amount of RMB 202 million (about USD 32.6 million) for RPM as well. Both agencies are local counterparts of the National Development and Reform Commission (“NDRC”), which is charged with the responsibility to enforce against price-related monopoly agreements, including RPM under the Anti-Monopoly Law (“AML”).

The news has made a huge stir, because this is the first time the Chinese AML enforcement agencies penalized RPM under the AML. Besides, the two fines add up to RMB 449 million (about USD 72.4 million) in total, the largest penalty in China’s AML enforcement history so far.

Finding of Violation

According to Sichuan PDRC, since 2009, Wuliangye signed agreements with more than 3,200 independent distributors to restrict the minimum resell price of its liquor. For those that did not implement the minimum price, Wuliangye adopted various punitive measures such as limiting their business, reducing supply, confiscating deposit money and marketing support money, and imposing fines. In 2011, Wuliangye stopped supply to a Sichuan supermarket chain in order to force the latter to comply with the RPM agreement. In 2012, Wuliangye punished 14 distributors across 11 provinces and municipalities for “selling below the minimum price, across regions and across channels”.

The official statement published by Sichuan PDRC pointed out that Wuliangye used its “market strength” to fix the minimum resale price. Such behaviors violated Article 14 of the AML, eliminated and restricted competition, and damaged the interests of the consumers.

To support this finding, Sichuan PDRC further analyzed the anti-competitive effects arising from such behaviors. Firstly, such behaviors restricted the intra-brand competition among distributors. Secondly, the RPM behaviors of Wuliangye restricted inter-brand competition, considering Wuliangye is a leading company in the industry and other competitors followed its RPM practice, causing greater damages and anti-competitive effects. Finally, its behaviors eventually damaged consumer interests because consumers were stripped of the chances to buy products at a lower price, in particular considering Wuliangye has a strong position in the market for strong aromatic Chinese spirits, and the substitutability of its products is low.

The statement made by Guizhou Pricing Administration is very short. According to the statement, Kweichou Moutai fixed the minimum resale price to third-party distributors since 2012 and punished those selling the products at a lower price. This conduct constituted a vertical monopoly agreement in violation of Article 14 of the AML, eliminated and restricted competition in the market and harmed consumer interests. There is no further elaboration on how Guizhou Pricing Administration reached into this finding.

Investigation and Penalty

Wuliangye was imposed a fine of RMB 202 million, representing 1% of the “related” sales revenue in the previous year. This is at the lower end of the range allowed by the AML (1-10%) and has taken into account Wuliangye’s full cooperation during the investigation and the prompt rectification of its behaviors (such as publication of the correction statement and withdrawal of the punishment imposed on the distributors).

Similarly, since Kweichow Moutai fully cooperated during the investigation, returned the confiscated deposit to the distributors, and immediately repealed the illegal policies, Guizhou Pricing Administration issued the ticket of RMB 247 million, which reportedly also represents 1% of Kweichow Moutai’s sales revenue in the previous year.

According to news report, the antitrust investigation may have started early January this year. On January 15, 2013, Kweichow Moutai announced that it had been “inspected” by the NDRC and the provincial pricing administration for engaging in distribution activities against the AML. In the press release, Kweichow Moutai committed to comply with the AML and to remove any marketing policies that violate the AML. On January 17, 2013, Wuliangye published a similar announcement. No formal announcement or comment was made by the NDRC or the local regulators at that time. 1

An interesting episode is that on February 19, three days before the official release of the penalty decisions, there was already news coverage saying that the two companies would be fined by NDRC in an amount of RMB 449 million in total for administering RPM. It is still a mystery how the information was leaked to the press before official announcement.

Comments

These two cases came only one month after NDRC’s penalty decision against the six international LCD companies for price-fixing. 2 It is the first time that a vertical monopoly agreement was penalized under the AML and once again showed NDRC’s determination to aggressively implement the AML. It also clears earlier doubt that China’s AML enforcement agencies may treat state-owned companies in a more lenient way.

There are a few points about the official statements that are noteworthy.

 Is RPM per se illegal or under the rule of reason analysis under the AML?

Under the US antitrust regime, there are two general approaches for analyzing agreements in restraint of trade, i.e. the “per se” rule and the “rule of reason”. For a type of agreements categorized as “per se” illegal, the illegality can be conclusively presumed without having to delve into the effect on competition in the market. Under the “rule of reason” test, the plaintiff must show the anti-competitive effects an agreement has or may have before the burden shifts to the defendant to show the pro-competitive effects of the challenged conducts.

These two concepts have been frequently borrowed in the discussion of how RPM is treated under the AML, i.e. whether it is per se illegal or subject to a “rule of reason” analysis.

When we look into Sichuan PDRC’s statement, it appears that a “rule of reason” analysis was adopted, as it addressed the anti-competitive effects of Wuliangye’s RPM behaviors, although the analysis is quite simple and straightforward. In addition, the statement also repeatedly mentioned Wuliangye’s strong market position although there is no indication if there is any market share threshold for RPM to be held illegal.

On the other hand, if we look at the AML provisions, it is fair to say that like the EU law, no agreements are per se illegal in the sense that the exemption clause of Article 15 applies to all types of monopoly agreements, even horizontal ones such as price-fixing. Therefore, the debate about whether RPM is “per se” illegal or subject to the rule of reason may not be exactly relevant in the AML context.

The more relevant question is: to what extent, the burden on the plaintiff or the enforcement agencies of proving the anti-competitive effects of the monopoly agreement will be considered sufficient for a shift of the burden to the defendant, and to what extent the pro-competitive effects or other social benefits fostered by Article 15 will be sufficient to outweigh the anti-competitive effects.

The Chinese court appears to have already given its answer to the above question in the Rainbow v.s. Johnson & Johnson case, in which the Shanghai Intermediate People’s Court placed a high burden on the plaintiff to prove the anti-competitive effects of the RPM agreement at dispute and ruled against the plaintiff on the ground that it failed to pass this test. The case is being appealed before Shanghai Higher People’s Court and the decision is yet to be rendered.

Judging from Sichuan PDRC’s statement on its face, it seems that the regulator might not consider the burden on its part to be that high. As mentioned above, the decision only adopted some simple qualitative analysis of the anti-competitive effects of Wuliangye’s conduct and its market power. On the other hand, the decision is silent on whether Wuliangye invoked any exemptions under Article 15 during the investigation. Therefore, it is hard to predict to what extent the NDRC is open to justifications for RPM.

Due to the lack of details in the two statements, it is still unclear what exactly is the approach adopted by the NDRC towards RPM. Nevertheless, these two cases have sent a strong signal to the market that vertical monopoly agreement has become a focus of NDRC’s AML enforcement activities. It will be vital for companies doing business in China to review their marketing activities and assess the legal exposure under the AML if they maintain any vertical restraints such as RPM.

In addition, it will be interesting to see how Shanghai Higher People’s Court will rule on the Rainbow case in particular considering the administrative authorities have shown a somewhat divergent approach. If the courts and the antitrust enforcement agencies are not aligned with respect to their approaches to RPM, companies will find them in a dilemma when making business decisions in their daily operations.

 Is vertical territorial allocation prohibited under the AML?

The Sichuan PDRC’s statement also mentioned that Wuliangye banned cross-regional sales and cross-channel sales in addition to restricting the minimum resale price. However, market allocation was not explicitly found to be illegal, and instead appears to be considered as measures used by Wuliangye to achieve the purpose of restricting the resale price.

Currently, the AML only provides for two types of vertical monopoly agreements, namely fixing resale price and restricting the minimum resale price. The State Administration for Industry and Commerce (“SAIC”), which is responsible for non-price related violations, has not promulgated any rules on non-price-related vertical agreements. Given the absence of the specific provisions, it seems that the NDRC has taken a cautious approach with respect to non-price-related vertical agreements, such as vertical territorial allocation.

 How is antitrust fine calculated?

According to Article 46 of the AML, for companies that enter into a monopoly agreement, the AML enforcement agencies are entitled to impose a fine ranging from 1–10% of their sales revenues for the previous year. There is no rule setting out the basis for calculation of the sales revenues. Therefore, it is not clear whether the basis for calculating the fine will be the group revenue or the revenue of the single company investigated, the worldwide revenue or the China revenue, or the revenue of the whole business or the revenue of the affected business.

In the present case, the two statements do not offer any additional clarification except that the fine on Wuliangye was said to represent 1% of its “related” sales revenue for the previous year. The wording seems to suggest that it is the revenue of the business that is affected or investigated, instead of the entire business that was used as the basis for calculating the fine.

In addition, according to some news report, Wuliangy’s sales revenue in 2012 may hit more than RMB 60,000 million 3, and Kweichow Moutai’s sales revenue in 2012 may hit around RMB 35,200 million.4 If this is the case, it would appear that the fine was not calculated on the basis of the sales revenues of the entire group in the previous year. To reduce legal uncertainty, legislative interpretation on this issue would be highly welcome.

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